Question

Ontario has been singularly successful at managing the Covid-19 Pandemic, and as a result, there has been a gradual re-opening of stores, hair salons, restaurants and movie theatres.

Suppose that the newly re-opened Movie Theatres reduce their price of admission from $20.00 to $17.00 to get people to come back. Suppose, as a result of the reduced price in movie theatres, the “New drive-in movie theatre” from question 1 experiences a reduction in the number of cars from their equilibrium of 350 cars to 275 cars a night.

i.     Using the information provided above, Determine the Cross-Price Elasticity of Demand following the “ARC” form as we don’t have an equation to work with here.

ii.    Given the Sign of your calculation, EXPLAIN carefully; (1) the Type of Relationship between the re-opened movie theatres and the “New drive-in movie theatre” AND, (2) the interpretation of the Elasticity value calculated.

Answer 1

i)

We shall use mid-point approach

Percent change in price of re-opened movie theaters=(17-20)/((17+20)/2)=-0.162162

Percent change in quamtity demanded for "New drive-in movie theater"=

(275-350)/((275+350)/2)=-0.24

Cross price elastcity of demand =Percent change in quamtity demanded for "New drive-in movie theater"/Percent change in price of re-opened movie theaters

=-0.24/(-0.162162)=1.48

ii)

1) We observe that sign of cross price elasticity of demand is positive. It means that "re-opened movie theaters" and "New drive-in movie theater" are substitutes.

2)

Calculated value of cross price elasticity of demand is 1.48. It means that 1% reductioin in prices of "re-opened movie theatre" will decrease the quantity demanded for "New drive-in movie theater" by 1.48%. It also means that that 1% increase in prices of "re-opened movie theatre" will increase the quantity demanded for "New drive-in movie theater" by 1.48%.